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Terms of trade, the trade balance, and stability: the role of savings behavior

Authors

Michael Gavin

Abstract

In conventional models of the open economy, the impact on the trade balance of a change in the terms of trade depends upon whether the Marshall-Lerner condition on demand elasticities is satisfied. This paper shows that, in a model which incorporates rational savings behavior, the link between the Marshall-Lerner condition and stability may survive intact or may be severed, depending upon the precise formulation of savings behavior.

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